This was from Barry Ritholtz, who does "THe Big Picture" blog. Best excuse for a liberal Wall Street guy I know of (though not
a big shot like Robert Rubin or Jon Corzine). > ----- Original Message ----- > From: Jim Devine > Sent: 08/11/08 12:56 pm > To: Pen-l > Subject: [Pen-l] efficient market hypothesis > > [I don't know where this comes from.] > > At this point, you would have thought the Efficient Market Hypothesis > would have died a quite death. But as is its wont on Wall Street, > myths, bad theories, and old information linger far longer than one > would expect. > > Today's case in point: The WSJ Ahead of the Tape column today > (Predicting What's Next Gets Harder) looks at how much of a future > discounting mechanism the markets actually are: > > >Investors often expect the stock market to behave like a crystal ball. > Lately it has made a better rearview mirror. > > >Conventional wisdom holds that the market efficiently reflects future > corporate earnings. This makes sense, as one ostensibly buys stocks in > companies to claim bucketfuls of their future profits. > > >For decades, turns in the stock market typically led earnings by roughly > six months. But during the past decade or so, stocks have moved roughly > in tandem with, and occasionally lagged, the trajectory of profits, notes > Tobias Levkovich, Citigroup's chief U.S. strategist.< > > I have several favorite examples of where markets simply get it wrong. > When I spoke with the reporter on this, I used the credit crunch as > exhibit A. It began in August 2007 (though some had been warning about > it long before that). Despite all of the obvious problems that were > forthcoming, after a minor wobble, stock markets raced ahead. By > October 2007, both the Dow Industrials and the S&P500 had set all time > highs. So much for that discounting mechanism. > > We've seen that sort of extreme mispricing on a fairly regular basis. > In March 2000, the market was essentially pricing stocks as if > earnings didn't matter, growth could continue far above historical > levels indefinitely, and value was irrelevant. How'd that work out? > > Three years later, the market priced tech and telecom in a similarly > bizarre fashion. Some of our favorite tech and telecom names -- > profitable, debt free firms -- were trading below their book value. > Some were even trading below cash on hand. > > The market had "efficiently" priced a dollar at seventy-five cents. > > The most fascinating aspect of this is the opportunity for anyone in > the market to identify inefficiencies. Discover where the market has a > non random error -- we've called it Variant Perception over the years > -- and you have a potentially enormous money making opportunity. > > This is the reason why everyone doesn't simply dollar cost average > into index funds -- its the lure of the big score. And as the recent > list of Hedge Fund Winners and Losers makes clear, the winners reap > enormous windfalls: > > "All of this suggests the stock market may prove less useful as a > leading indicator of profits and economic growth. But it also suggests > stocks are likely to get out of balance more often, creating > opportunities for savvy investors." > > Levkovich points to the "proliferation of hedge funds" as making > markets "increasingly focused on breaking news and short-term swings, > rather than longer-term fundamentals." I would add the narrow niche > focuses used to differentiate amongst funds and raise capital also > contribute to this phenomenon. We end up with a case of the six blind > men describing the elephant, with few seeing the big picture. > > To an EMH proponent, however, hedge funds should make markets more, > not less efficient. Their long lock period (when investors cannot take > out cash) means they should have a longer time horizon for investment > themes to play out. > > One of my favorite quotes on the subject comes from Yale University > economist Robert Shiller. He notes the huge mistake EMH proponents > have made: "Just because markets are unpredictable doesn't mean they > are efficient." That false leap of logic was one of "the most > remarkable errors in the history of economic thought." > > Just don't tell certain Traders that. They hate hearing that markets > contain a high degree of random action and inefficiencies. > > Except for the really clever ones . . . > > Source: > Predicting What's Next Gets Harder > MARK GONGLOFF > WSJ August 11, 2008 > http://online.wsj.com/article/SB121841270391428377.html > > -- > Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own > way and let people talk.) -- Karl, paraphrasing Dante. > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l >
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